SIFA 9.10 Assessing your customer's understanding of risk

When you conduct investment business for private customers, you must ensure that you take reasonable steps to ensure that they understand the nature of the risks involved with the transaction (COB 5.4.3 R).

Assessing attitude to risk is a fundamental part of the 'know your customer' process and of suitability. You will want to recommend products or services that are suitable for your client's risk profile. This is so that they are happy with the service you have provided.

Assessing your customers' understanding of risk will help ensure that you meet the requirements set out in the following Principles:

• Principle 7 (Communications with clients) requires you to pay due regard to the information needs of your clients and to communicate information to them in a clear, fair and not misleading way.
• Principle 9 (Customers: relationships of trust) requires you to take reasonable care to establish the suitability of advice that you give.

You must establish what each client considers an acceptable level of risk to be for them and advise them on that basis. When you have a clear understanding of your client's attitude to risk (i.e. whether they are risk averse or willing to take some degree of risk) you will be in a better position to recommend suitable products.

The requirements for assessing your customers' understanding of risk and providing risk warnings are set out in COB 5.4.

COB 5.4 refers to the requirement for an adviser to assess a private customer's understanding of risk for any personal recommendation (COB 5.4.3 R). Special risk warnings apply in addition for:

• warrants and derivatives (COB 5.4.6 E);
• retail securitised derivatives (COB 5.4.6A E);
• non-readily realisable investments (COB 5.4.7 E);
• penny shares (COB 5.4.8 E);
• securities subject to stabilisation (COB 5.4.9 E); and
• stock-lending activity (COB 5.4.10 E).

A firm has a general duty to ensure that it has taken reasonable steps to ensure that its private customers understand the risks involved with any investment product that the firm recommends to them (COB 5.4.3 R) and, similarly, with the risks involved in mortgage and/or general insurance products.

Your client may have different attitudes to risk for different products. You should not assume they would have the same attitude to risk for all their financial planning needs.